What the ‘Unofficial’ Numbers Say About China’s Economy

On the eve of China’s annual legislative conclave, growth in the world’s second-largest economy has rebounded – but doubts about the reliability of the data remain.

China Real Time has an intern attempting to tunnel into the secret vault below the National Bureau of Statistics where we believe the true numbers are held. But armed only with a disposable chopstick, it may take him a while.

In the meantime, we have amassed an array of alternative data points to try and understand what’s going on with China’s economy. Check out the charts – it’s easier than chipping through concrete with a thin piece of wood:

Official data on China’s gross domestic product show the slowdown in growth in the last two years as moderate, and in line with government targets. A 7.8% increase in output in 2012 was narrowly down from 10.4% in 2010, and above the official target of 7.5% for the year. But the real situation may be a lot less rosy than the official data suggest.

Stephen Green, China economist at Standard Chartered, says the official numbers reflect an underestimate of inflation, resulting in an overestimate of real growth. Using an alternative measure of service sector inflation, Mr. Green calculates GDP growth at 5.5% in 2012 – putting the world’s second-largest economy in hard landing territory.

Mr. Green’s choice of a higher deflator – a price index used to strip inflation out of the calculation of growth – makes some sense. Prices for services like healthcare and education are rising fast. Still, Mr. Green says that 5.5% is a guesstimate rather than a firm conclusion.

If alternative estimates suggest China’s 2012 growth was lower than believed, there are also signs that the year ended on a positive note.

The HSBC purchasing managers’ index came in at 52.3 in January, the third month in a row above the 50 mark that separates growth from contraction. A business survey by Market News International shows a similar trend, with a flash reading of 61.8 in February – the highest since May 2011.

Real economic activity – measured by indicators like electricity output, passenger traffic and freight — also showed signs of improving. Capital Economic’s China Activity Proxy, which bundles together several real activity indicators, rose 7.3% year-on-year in December, up from a trough of 6.1% in July.

Investment, the biggest contributor to China’s GDP, continues to be ill served by the monthly fixed asset investment data. Since 2003, FAI has over- and undershot gross fixed capital formation – the more accurate measure of investment growth used in the GDP data – often by a wide margin.

That suggests the 21% year-on-year growth rate shown by the December FAI data needs to be taken with a large grain of salt. Alternative indicators point to a considerably lower rate of growth. Steel prices on the Shanghai market were down 12% year-on-year in January. Excavator sales were down 14% in December according to the China Construction Machinery Association.

More positively, data from Soufun shows China’s real estate sector is building again. Sales volume in Beijing and Shanghai rose strongly in the final months of the year, and prices rose with them. That’s pushed growth in land transactions, shrinking for much of 2012, back into positive territory – a hopeful sign for property investment going into 2013.

China’s retail sales data is also an imperfect measure of the real level of household spending, consistently overshooting the more accurate measure of household consumption used in the GDP data.

Alternative indicators of household consumption suggest the cash registers are not ringing quite so fast Nike’s revenue in Greater China fell 12% year-on-year in the three months to November. Yum! Brands, the owner of KFC, saw same store sales falling 6% in the final quarter. McDonalds reported negative comparable sales in October and January. All contrast sharply with a 14.5% growth rate for retail sales in the fourth quarter shown by the official data.

Results for individual companies can be blown of course for idiosyncratic reasons. Yum’s sales have been hammered by a food safety scandal, for example.

Broader measures of retail activity are less dire than the company reports, but also less impressive than the official retail sales data.

Nielsen’s index of fast moving consumer goods sales was up 9% year-on-year in December. The China Beige Book – an independent survey of China’s economy – reports that 61% of the retailers they surveyed had higher sales revenue in the fourth quarter, up from 58% in the third, but still below the level in the first half of the year.

Passenger car sales, a significant component of household spending, also stalled. Data from the China Association of Automobile Manufacturers shows car sales up just 7% year-on-year in December. Channel stuffing – where auto firms strong-arm dealers to take on inventory – might mean that sales to end-users are even lower.

Employment indicators provide a more positive view. The HSBC PMI employment index edged back above 50 in December and stayed there in January, suggesting firms are adding a few more workers. Yum reported 10% year-on-year wage inflation in the fourth quarter. Both pointed in the same direction as the official data – toward tight labor markets and rising wages. That should support consumption growth into 2013. It also suggests China’s economy can cope with a slowdown without suffering crippling unemployment.

Trade data has been a bright spot among China’s economic indicators, with the Customs Bureau publishing timely, accurate, and detailed data on imports and exports. Unfortunately that reputation has taken a battering in the last two months, with murmurings that exports may be overstated by a considerable margin.

The official data shows resurgent exports coming into 2013, with 14% year-on-year growth in December. But a growing discrepancy between data on China’s exports to Hong Kong and Hong Kong’s imports from China, suggest that might be an exaggeration. Louis Kuijs, China economist at RBS, says that export growth could be overstated by as much as 4 percentage points.

The outlook for exports also appears muted. The HSBC PMI index of new export orders came in at 50.5 in January, only fractionally above the line separating expansion from contraction. A November 2012 survey by trade information firm Global Sources shows 51% of participants expected exports to grow in 2013, down from 93% when a similar survey was done on the outlook for the first half of 2012.

China’s official data is much maligned. In the last few years, the National Bureau of Statistics has taken considerable steps to improve the collection and reporting of key data points. Most recently, the official PMI has expanded its sample to more than 3,000 firms, considerably more than the HSBC PMI’s sample of around 400 firms.

Problems that remain more often reflect technical issues or challenges keeping pace with rapid changes in China’s economy, rather than a deliberate attempt to mislead. Alternative indicators have their own problems, and are often less representative than the official data they attempt to replace.

That said, a couple points seem worthy of attention: First, the trend shown by many of the alternative series is broadly similar to the official data – a slowdown in 2012 with a pick-up in growth at the end of the year. But second, the slowdown may have been sharper, and the pick-up in growth weaker, than the official data suggest.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.